Private capex confidence still catching up as uncertainty clouds investment decisions

Uneven demand, volatile commodity prices, trade-related uncertainty amid heightened geopolitical tensions and competition from cheap imports are weighing on corporate capital expenditure decisions, with investment confidence still "catching up", Times of India reported, citing a paper prepared for a two-day banking conclave attended by Finance Minister Nirmala Sitharaman.

The paper, prepared by SBI Caps, said large capital projects require confidence not just in current demand but also in the visibility of future cash flows. Persistent uncertainty over pricing, input costs and end-market demand is prompting companies to defer investments.

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"Large capital projects require confidence not only in current demand but also in future cash flow visibility. When pricing, input costs and end-market demand remain uncertain, companies often choose to defer investment," the paper said.

While most large companies have the borrowing capacity and internal resources needed to expand, the key question is whether management teams are "sufficiently confident" to commit those resources to fresh investments, it said.

The paper expects the next investment cycle, spanning FY27 to FY31, to see average annual expenditure demand rise to around Rs 30 lakh crore from approximately Rs 20 lakh crore during FY22 to FY26. However, the demand for funds is likely to be uneven, based on an analysis of current cash deployment by NSE 200 companies.

"Many companies have prioritised dividends, acquisitions and retaining on balance sheets over greenfield expansion," it said.

The pattern of capital deployment varies sharply across sectors. IT and FMCG companies are prioritising dividends, while manufacturing and infrastructure remain high-capex sectors with relatively low dividend payouts. Metals combine high capex with high dividends, while pharma is characterised by low dividends and low capex.

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"Capital deployment is expected to remain concentrated in sectors where structural demand growth, policy support and capacity constraints create a compelling case for fresh investments," the paper said.

Public investment key to next capex cycle

The paper said sustained public-sector investment would remain an important foundation for the next phase of private capital expenditure.

Government spending on transport, power, logistics and urban infrastructure is generating demand for private-sector suppliers while also improving the infrastructure needed to support broader industrial expansion, it said.

Investment opportunities are emerging in areas including semiconductors, advanced manufacturing, data centres and other technology-led sectors.

However, the paper cautioned that banks alone may not be able to meet the financing requirements of the next investment cycle.

While banks are expected to remain the dominant source of funding, a broader financing ecosystem will be needed as bank balance sheets are increasingly unlikely to support the entire requirement.

Debt capital markets, securitisation structures, alternative investment funds, pension and insurance capital, infrastructure investment trusts and foreign investors will need to play a "larger role" than they do today, the paper said.

Banks are expected to finance roughly 70% of the projected Rs 85 lakh crore in external funding requirements during FY27-FY31.

Banks urged to prepare for investment revival

The paper recommended several measures for banks to undertake over the next six months to support the expected investment cycle.

These include developing a pipeline of bankable projects through a screening framework and fast-tracking environmental clearances.

It also called for deepening debt capital markets by mobilising more institutional capital, including from the Employees' Provident Fund Organisation (EPFO) and insurance companies.

The recommendations come as policymakers and lenders prepare for a potential revival in private investment, even as companies remain cautious about committing capital amid uncertainty over demand, costs and global trade. (With inputs from Times of India)